Internal Emails: J&J Knew of Bribery "Black Hole" for Years

By Jim Edwards

Updated on: April 11, 2011 / 11:55 PM
/ MoneyWatch

Johnson & Johnson (JNJ) CEO William Weldon said the $70 million in foreign bribery settlements his company just made "are not representative of Johnson & Johnson employees around the world who do what is honest and right every day." But J&J's internal emails, plus the U.K. Serious Fraud Office's records, indicate that J&J management knew as early as 1999 that it was making improper payments to Greek sales agents, and that money was disappearing into what it called a "black hole" in Europe.

Yet J&J later acquired the company that operated that "black hole" in order to maintain its illegal sales relationships in Greece, according to the SEC's complaint. And although the SEC praised J&J's cooperation in its probe, J&J took eight years to initially inform the SEC of its problems.

To give you an idea of the scale of J&J's "not representative" activities, the violations occurred between 1998 and 2006 in Greece, Poland, Romania, and Iraq. J&J paid "commissions" to various local agents of between 10 and 35 percent to do business in those countries. The case involved the following units of J&J: three units of medical device company DePuy, J&J Poland, Janssen-Cilag Europe, Cilag AG in Switzerland, and Janssen Pharmaceutica N.V. in Belgium.

Commissions or bribes?
The Greek problem came to J&J management's attention almost immediately after it acquired Depuy International in 1998. To comply with J&J's anti-kickback policies, J&J told Depuy it must stop making payments to a Greek agent who in turn bribed doctors to buy Depuy's medical implants. But an unnamed "Executive A" at Depuy objected to ending the payments. The SEC's complaint identifies Executive A as a U.S. resident and a senior executive at J&J.

J&J began due diligence to acquire the company and in April 2000 a J&J executive based in Europe sent an e-mail to Executive A describing problems in Medec's books. The accounts would not pass a "smell test" if audited because of all the money going into a Greek "black hole," the executive wrote:

No payoffs, please -- we're corporate
Worse, Medec's Karagiannis kept putting his requests for bribes in writing. An unnamed Depuy vice president scolded him for it in January 2001:

With Medec now renamed Depuy Helles, it was supposed to have abided by J&J's rules requiring employees to obey the Foreign Corrupt Practices Act, which bans paying kickbacks to foreigners in order to make sales. But Depuy employees ignored that. In January 2005, a new "Code of Business Practice" went into effect, sponsored by medical device lobby group Eucomed, which also frowned upon paying kickbacks. A DPI vice president wrote the head of DePuy Helles and his supervisor that Depuy broke "every single rule in the book":

Finally, in 2006, J&J's internal audit team woke up to what was happening in Greece. And then it decided to ignore it, according to the SEC's complaint:

The issue of payments to surgeons had [also] been previously raised in an anonymous 2003 letter to a different internal audit team concerning a related J&J subsidiary in Greece. However, that team concentrated their investigation on allegations about a possible conflict of interest by local management and did not fully investigate the alleged payments to doctors.

Robert John Dougall, director of marketing at DePuy was convicted of making Â£4.5 million in corrupt payments. While Weldon believes the acts were "not representative" of J&J, the judge in Dougall's case thought otherwise. He said:

Corruption was, in effect, a company policy pre-dating your involvement and approved by your superiors. ... it is likely to have involved the knowledge, consent and participation of individuals with senior responsibilities in the group of companies in which you worked. ... [and the] corruption was systemic and long-term ...

The case came to light because Dougall became a whistleblower. He admitted wrongdoing and British prosecutors asked the court to give him a suspended sentence for helping make their case. Instead, the judge gave him 12 months in prison. Dormer, Dougall's boss, became chairman of JenaValve, another medical device company.